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Years ago, at a pervious firm, I worked with a gentleman named Bobby Merrick. Each year after Labor Day, Bobby was famous for telling us fellow advisors that it was time to get the sand out of your shoes and get back to work. Against that backdrop, I will try to set the stage for the final four months of 2026.
As we enter the final months of 2026, investors have good reason to be encouraged by the performance of the financial markets. U.S. stocks have generated solid gains this year, supported by strong corporate earnings, continued economic growth and extraordinary investment in artificial intelligence and related infrastructure. At the same time, the market has reached valuations that leave less room for disappointment. We therefore believe the appropriate outlook for the remainder of the year is one of cautious optimism—recognizing the potential for additional gains while remaining prepared for periods of increased volatility.
Corporate earnings remain perhaps the strongest argument in favor of the market. American companies have generally demonstrated an impressive ability to grow profits despite higher interest rates, inflationary pressures and an uncertain geopolitical environment. Technology and artificial intelligence have been important contributors, but opportunities are increasingly extending beyond the largest technology companies. Industrials, financial companies, utilities, energy producers and businesses involved in building America's expanding digital and power infrastructure could all benefit as investment spreads throughout the economy.
Interest rates and inflation will likely play an especially important role during the final months of the year. The Federal Reserve continues to balance its goal of controlling inflation against the need to maintain healthy economic growth and employment. Investors would welcome additional evidence that inflation is moving sustainably toward the Fed's long-term objective. Conversely, renewed inflationary pressures could keep interest rates higher for longer and place pressure on both stock valuations and bond prices. For that reason, monthly inflation and employment reports are likely to produce periods of market volatility.
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